What to expect for U.S. equities?
25 NOV, 2025
By Schroders
The U.S. economy and stock markets continue to show signs of strength, even amid concerns about tariffs and Federal Reserve policy. As always, investors may benefit most by focusing on fundamentals rather than trying to predict the impact of short-term trends.
A still-strong outlook for the U.S. economy
George Brown, Senior U.S. Economist
Even with all the setbacks that worried investors earlier this year—including rising tariffs, a weakening dollar, and global capital outflows from the U.S.—the U.S. economic growth outlook remains solid. Two major U.S. stock indices, the S&P 500, which represents large-caps, and the tech-heavy NASDAQ, have surged to all-time highs.
Federal Reserve rate cuts could also support markets, as history suggests that cutting rates in a growing economy, rather than during a recession, tends to be positive for equities.
Two potential risks shead: higher tariffs and a Fed policy mistake
Some observers have expressed concern about the U.S. labor market, with recent evidence of some hiring weakness. However, the labor market remains tight, and conditions appear stable.
Uncertainty around trade and the possibility of further tariff increases could pose greater risks for the economy and markets.
Before President Trump began his second term, the effective U.S. tariff rate was around 2%, historically low. By early autumn, it had risen to around 12%. If the 100% tariff on China that President Trump threatened were enacted, the effective tariff rate would jump to 23%.
Economists estimate that every 10% increase in the tariff rate generally adds about 1% to inflation and subtracts half a percentage point from GDP growth.
Another key risk is that the Fed could make a policy mistake. Some might question whether rate cuts are necessary, given the U.S. has experienced solid growth even with relatively high rates. This suggests the Fed’s estimate of its neutral rate—a rate that is neither too stimulative nor too restrictive—may be too high.
The projected median neutral rate is now around 3%, but with current interest rates above 4%–5% and the economy still showing strong growth, targeting 3% could be too accommodative. Sticking to this view and cutting rates further could fuel inflation and become a Fed policy error.
Inflation remains a potential risk
Inflation could become a bigger concern because markets currently seem to undervalue this risk.
While a weaker dollar also brings challenges, U.S. companies with international operations could benefit because currency weakness lowers prices of their goods and services in non-U.S. markets, boosting revenues.
Long-term stock pickers shouldn’t worry about current market conditions
Frank Thormann, Global Equities Portfolio Manager
In our view, investors may perform better over the long term by focusing on company fundamentals and not worrying too much about current market sentiment.
Over time, stock prices follow corporate earnings, and the best companies benefit from characteristics such as:
- operating in industries with high barriers to entry,
- superior products,
- market-share gains, and
- pricing power,
all of which support strong profit distribution across the market cycle.
Searching for growth gaps
We believe that returns exceeding benchmark indexes can be achieved by identifying “growth gaps”—companies whose long-term growth prospects are underestimated by the market.
For many companies, consensus views appear accurate, but situations still exist where analysts fail to fully appreciate the long-term benefits of a competitive edge.
Short-term thinking—made more common by algorithmic trading and higher retail investor participation—contributes to this mispricing.
We believe the core of a portfolio focused on growth gaps should include companies with exceptional competitive advantages. These could be:
- a structural advantage such as a unique distribution channel,
- operating in an industry with significant entry barriers,
- strong intellectual property, or
- a dominant brand with high customer loyalty.
“Opportunistic” positions may include companies at the peak of their economic cycle or recently pressured firms with new management teams or strategies preparing for a significant turnaround.
Case study: streaming service with a potentially virtuous cycle
Netflix provides a strong example of a company with a clear long-term advantage.
The cost of providing great content does not change based on how many people watch it. As Netflix’s subscriber base grows, its cost per subscriber to produce excellent content continues to decline.
This creates a virtuous cycle:
- Customers subscribe because Netflix offers high-quality content.
- Netflix uses its success to produce even better content.
- That great content attracts more subscribers, strengthening the cycle.
We believe the market has not fully recognized all the benefits of this advantage for Netflix.
An alternative to chasing market returns
Chasing broad market returns carries risk because gains made during a rally can be quickly lost during a downturn.
Focusing on outstanding individual companies and maintaining diversification across businesses with distinct competitive advantages has the potential to deliver much better risk-adjusted returns.